An Outstanding Large-Cap Fund for Patient Investors – Morningstar.com

Dodge & Cox Stock’s deep investment team, decisive value approach, and rock-bottom fees inspire confidence in its ability to outperform over the long term. The fund also benefits from the exemplary stewardship practices of its San Francisco-based parent company. It continues to merit a Morningstar Analyst Rating of Gold.

Dodge & Cox’s eight-person U.S. equity investment committee, whose members have been with the firm for an average of 24 years, manages the fund. Moreover, a deep and experienced analyst team, most of whom are Dodge & Cox lifers, support the committee. The seasoned investment staff, combined with the consensus-oriented team approach, limits key-person risk.
The committee seeks firms it considers to be undervalued versus their true long-term worth. It relies on bottom-up, fundamental research and favors firms with good management, competitive advantages, and solid growth potential. Oftentimes, it takes advantage of bad news or a bad economic environment to buy fundamentally strong businesses. Once management buys, it tends to hold on for the long term, so expect turnover to remain low. Indeed, some holdings such as Wells Fargo and FedEx have been in the portfolio since the 1980s and 1990s.

Since Charles Pohl and Bryan Cameron joined the committee in January 1992, through June 2017, the fund’s annualized gain of 11.5% beats the Russell 1000 Value’s and S&P 500’s gains of 10.0% and 9.3%, respectively. The team’s contrarian nature and willingness to be patient while theses play out have contributed to the fund’s long-term success but also have come with elevated volatility and downside capture levels. This was evident during the financial crisis of 2007-09, and the fund also lagged in a volatile 2011. But the fund has bounced back: During the trailing five-year period ended June 2017, the fund’s 16.4% annualized gain outpaced the Russell 1000 Value’s 13.9% gain as well as 99% of its large-value peers.
All told, this fund requires patience. It likely will reward investors willing to stomach short-term pain, but it is not for everyone.Process Pillar: Positive | Andrew Daniels, CFA, CMA 07/10/2017This fund’s decisive value approach earns it a Positive Process rating. The fund holds primarily large-cap stocks that look cheap on a range of valuation measures. The managers rely on bottom-up, fundamental research and favor firms with good management, competitive advantages, and solid growth potential. Oftentimes, they take advantage of bad news or a bad economic environment to buy fundamentally strong businesses. Once management buys, it tends to hold on for the long term, so investors should expect turnover to remain low. In fact, annual turnover has averaged 15% during the past five calendar years, well below the large-value category average of 55%. On a weighted-average basis, the fund has held the stocks in the portfolio for approximately eight years. The managers sell when valuations get rich, fundamentals deteriorate, or better opportunities become available. When valuations decline, they often seize the opportunity to increase stakes in stocks in which they still have strong convictions. While the approach is bottom-up, picks tend to cluster in sectors. As of March 2017, the fund had a combined 68% of assets in financials, technology, and healthcare stocks. Still, the fund is well-diversified, with the top 10 picks making up about a third of assets. As it has for several years, the portfolio has elevated exposure to stocks that would benefit from higher interest rates. For instance, the fund’s 29% weighting to financials as of March 2017 was partly driven by banks Wells Fargo and Bank of America , as well as online brokerage firm Charles Schwab . On the flip side, the fund had limited exposure to dividend-heavy REITs, utilities, and consumer defensive stocks because the managers here believe such stocks have been bid up by investors’ hunting for income in a low-interest-rate environment. Relative to the Russell 1000 Value Index, the fund has emphasized technology and healthcare stocks. In technology, the fund continues to own Hewlett-Packard spin-offs HP Inc and Hewlett Packard Enterprise . In healthcare, the fund has sizable exposure to drug manufacturers such as Sanofi and Novartis .

Dodge & Cox has recently increased its stake in pharmacy benefits manager EExpress Scripts Holding because the managers thought the stock was trading at a compelling valuation even after adjusting for the potential loss of its biggest customer, Anthem . The managers also purchased Bristol-Myers Squibb after one of its immuno-oncology drugs failed clinical trials in late-2016 because the firm still had a strong pipeline of drugs and was trading at a reasonable valuation.Performance Pillar: Positive | Andrew Daniels, CFA, CMA 07/10/2017 This fund has been a long-term winner, earning it a Positive Performance rating.

Since Charles Pohl and Bryan Cameron joined Dodge & Cox’s U.S. equity investment committee in January 1992, through June 2017, the fund’s annualized gain of 11.5% beats the Russell 1000 Value Index’s and S&P 500’s gains of 10.0% and 9.3%, respectively. Moreover, during the past 20 years, the fund’s five-year rolling returns beat the Russell 1000 Value Index 63% of the time.
The team’s contrarian nature and willingness to be patient while theses play out have contributed to the fund’s long-term success but also have come with elevated volatility and downside capture levels. This was evident during the 2007-09 financial crisis and during a volatile 2011. The fund has since bounced back: During the trailing five-year period ended June 2017, the fund’s 16.4% annualized gain outpaced the Russell 1000 Value’s 13.9% gain as well as 99% of its large-value peers. Key contributors to performance included telecommunication services Time Warner Cable and Charter Communications –which merged in 2016–as well as Sprint . Strong stock selection in technology–including Hewlett Packard Enterprise–also drove results. This fund requires patience but can reward long-term investors willing to stomach short-term pain.People Pillar: Positive | Andrew Daniels, CFA, CMA 07/10/2017 This fund’s deep and experienced investment team earn it a Positive People rating.

Dodge & Cox’s eight-member U.S. equity investment committee manages the fund. The committee averages 24 years of tenure at the firm and includes current chairman and CIO Charles Pohl, director of research Brian Cameron, and director of international equity Diana Strandberg. While the committee is quite stable overall, changes occasionally take place. In advance of the planned retirements of longtime committee members John Gunn and Greg Serrurier in 2016, Kathleen McCarthy (who joined Dodge & Cox in 2007) became a member of the committee in January 2016. Dodge & Cox’s deep team, collaborative approach, and careful succession planning all help mitigate key-person risk.

The analyst ranks are also broad and deep, with impressive levels of experience. As of May 2017, the firm had 32 industry analysts and managers on the equity side; all but three have been at the firm for more than five years. There are also 28 analysts and managers with similar levels of experience on the fixed-income side–who sometimes pitch in here–as well as approximately 25 research associates on two-year contracts. Nearly all of the analysts and managers have spent their entire careers at Dodge & Cox. Indeed, analysts and managers rarely leave for any reason besides retirement.
Parent Pillar: Positive | 05/02/2016

Dodge & Cox is an exemplary firm. CEO and president Dana Emery and chairman Charles Pohl are also lead members of the investment team and run both the firm and its funds with a long time horizon. The average fund manager tenure of more than 20 years is exceeded only by a few boutiques and is much higher than is typical for a large fund company.
There are no stars here; each fund is run collaboratively by an investment policy committee. Ideas can come from any analyst but must survive extensive peer review. Although the funds have seen outflows in recent years, the firm has continued to build the investment team at a slow-and-steady clip. It totals roughly 60 managers and analysts, most of whom become partners.

Dodge & Cox has rolled out only six strategies since it first opened in 1931. The most recent is a global fixed-income offering that launched in May 2014; the firm developed its foreign-bond capabilities as a natural extension of its international-equity expertise. While the firm has eschewed marketing, it is among the largest mutual fund companies today. Asset growth can hinder execution, but management has proved willing in the past to safeguard its strategies by closing funds.
Managers are heavily invested in the funds and the firm and have ample incentive to serve shareholders, as evinced by low costs, clear communications, and a sober long-term approach.Price Pillar: Positive | Andrew Daniels, CFA, CMA 07/10/2017This fund is one of the cheapest actively managed options available, giving it an advantage over nearly all peers. Management’s low-turnover strategy has also minimized transaction costs. The fund earns a Positive Price rating. All assets are in the fund’s no-load share class, which charges 0.52%. By comparison, the median net expense ratio for the large-cap no-load peer group is 0.90%.